TOKYO — Shiseido Co. Ltd.’s underperforming Bare Escentuals division will cause the Japanese beauty giant to post its first full-year loss in eight years but the American brand is still considered a key part of the group’s long-term growth strategy.
Shiseido warned Wednesday that it will post a net loss of 14.7 billion yen, or $177.87 million at average exchange, for the year ending March 31 as it books an impairment loss of 28.6 billion yen, or $347.1 million, on the goodwill associated with Bare Escentuals, a company known for its powdered mineral-based foundation. In January, when releasing its nine-month numbers, Shiseido said it expected full-year net income to fall 27.7 percent from a year ago to 10.5 billion yen, or $127.05 million.
Shiseido said that Bare Escentuals, which it acquired in 2010 for a hefty $1.7 billion, has not been performing as well as expected and the gap between its sales budget and sales performance has been widening over the past few months.
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Still, the group’s corporate executive officer Carsten Fischer stressed Shiseido believes in the business potential of Bare Escentuals. He characterized the recent sales performance as a temporary setback attributable to overall macroeconomic conditions and increasing competition, particularly in the arena of home shopping network QVC. The executive said ultimately the company decided to write down the value of Bare Escentuals to give it more financial flexibility down the line to develop the business. He said Shiseido had to limit the investments it was making in Bare Escentuals to keep the business profitable and in line with its valuation so it’s time to rectify that situation.
“We are very bullish on Bare Escentuals, Bare Minerals as a brand. It’s a sizable brand for us and it has contributed over the last couple of years significantly in terms of profit, in terms of turnover and in terms of cash,” Fischer said. “We have to face reality. We have to face reality now and we should not delay [the write-down] further for the sake of the brand and the future of the brand.”
Fischer declined to give sales figures or projections for Bare Escentuals but a Shiseido spokeswoman specified that the brand is posting double-digit sales growth. Bare Escentuals’ annual sales were north of $500 million when Shiseido bought the company in 2010. Fischer was quick to point out that Bare Escentuals has a higher profit ratio than many of the other brands in Shiseido’s portfolio and is “significantly” higher than the group’s average. He specified that the business has been generating three-digit millions of dollars worth of cash flow over the last few years.
“It’s a profitable business for us, it’s a good cash generator and it’s something worth fueling,” he said, forecasting that Bare Escentuals’ top line will be flat or fall slightly in 2013 and will start to recover in 2014. “We want to make sure we don’t stretch ourselves too much with the sales forecast.”
Fischer said Bare Escentuals is seeing strong growth in international sales and the company is focusing its efforts on select markets such as the U.K., Japan and Brazil.
He said Bare Escentuals will start to invest more in promotional and marketing activities to be more competitive with other cosmetics brands, although he declined to give investment figures. He said the brand will also revisit its retail distribution of 200 stores in the U.S. and close some stores, but these won’t be a significant number of locations. Fischer also said Bare Minerals will be rolling out more skin-care products next year, which should help grow the business.
“It’s a growing market, the United States, and you know there are only a few growing markets left and everybody rushes in. So that [competition] has increased and we have to adjust for that,” he said.
Shiseido has faced some significant challenges recently. Last month, the company’s president and chief executive officer Hisayuki Suekawa resigned unexpectedly, citing stress and a strain on his health as the reasons behind his departure. Chairman Shinzo Maeda, who had retired from the ceo role before Suekawa took on the position, returned to manage the company on a daily basis.
The company has been underperforming both in its native Japan and abroad, particularly in the key market of China. Shiseido has blamed Japan’s ongoing political tensions with China for a slide in its business there but Fischer noted that sales are starting to recover and Shiseido plans to outline a new strategy for China to improve sales and profits in the country. He declined to go into specifics and said Maeda will provide more details on Friday, when Shiseido releases a more detailed set of full-year results.
According to the guidance provided Wednesday, Shiseido sees full-year net sales coming in at 677.50 billion yen, or $8.20 billion. That compares with January’s estimate of 680 billion yen, or $8.22 billion.
The company actually inched up its operating profit forecast to 26 billion yen, or $314.60 million, from its previous estimate of 24.5 billion yen, or $296.45 million.